Question

. Consider a simultaneous move game between a teachers’ union and a university. Each agent can bargain hard (H) or accommodate (A). If both the parties bargain hard (H,H), each would gain nothing. If only one party bargains hard the accommodating party gets a benefit of $1 million while the bargaining party gets a $5 million, while if they both accommodate (A,A), they each get $3 million in benefit.

a. Draw the bargaining game in normal form (a matrix).

b. Does either player have a strictly dominated strategy? b. Find each party’s best response and the Nash equilibrium in pure strategies.

c. Is this Nash equilibrium Pareto efficient? Why or why not?

d. Describe a scenario in which the union might threaten an action that might ensure they get the outcome they would prefer.

Answer 1

d) If the teacher's union announce that they will play H (bargain hard) no matter what, then the University will think that it is better to play A (accomodate) than to play because if they play H, then they will gain nothing whereas if they play A, they will gain $1 million. In this scenario, the threat issued by the teacher's union may compell University to play A and Teachers union will gain $5 million which is their desired outcome.